Thoughts Sans Boundaries

Economy Moving Forward

Posted in Uncategorized by Aditya Moorthy on November 14, 2009

I had a thought this afternoon about the economy.

Disclaimer: I am not an economist and probably understand0.0001% of economic principles and the way of the world.

My understanding goes this way: America is the biggest consumer of the world, closely followed by Europe and Japan and a bulk of the world’s production is being consumed by a relatively small population of this planet. For this argument, let’s look at just America as the key consumer. America borrows significantly large sums of money to foster their consumption and the producing worlds lends the monies to America to sustain the consumption. I don’t wish to go into the details to justify this as it is too complex and there is a good possibility that my understanding is flawed.

If the above it mostly true, then it poses an interesting problem. Beyond a critical point, the lending to the consumers does not make sense as you don’t see your earned money appreciating enough as the borrowers are not returning money and neither does the money grow. So what can the producers do to safeguard themselves? For one, they can foster internal consumption so at the least the monies stays within their economic domain, which is probably what Japan did and China and India are trying to do.

This poses an interesting situation. If the developing economies no longer depend on America to consume their produce, they no longer need or care America to consume so much and which means, they are no longer a cheaper destination to produce goods as the local demand increases so does the cost of production (as the demand out paces the supply, at least in the short term, the cost of goods will go up). That leaves America with two choices (loosely speaking) – reduce consumption or produce locally to support internal demand. The first option is harder to implement unless there is a social and cultural change. The second option looks like a practical one, only that the cost of production has reached such a high point that it is too expensive for peoples to afford it unless they borrow more.

Where does this leave America and the rest of the world. Some thoughts:

– Is this a harbinger that America will no longer be the most powerful country in the world and there will arise a community of powerful nations?
– Is this a harbinger for an exponential increase in consumption to sustain the economy and put a big strain in the natural resource of this planet
–  Is this a harbinger for power struggle to stay on the top by a new community of nations when in the past it was a de-facto single country

The above thoughts sure look like bleak ones, but it need not be all bleak. There might be some silver lining. This could foster a cultural / social change of sustaining economy with reduced consumption – which means, new economic / social models evolving out of this bottleneck situation. America is known to be a land of innovation and they could innovate themselves out of it. This could also cause the wealth to be more evenly distributed around the world thus reducing envy, anger and frustration which happens to be the cause of most violence.

There are several ifs and buts and it is hard to really predict what could happen but there sure is a change that seems to be driving the focus away from the Americas as the leading nation in the world and lesser known voices being heard.

So brace yourself for an interesting ride that potentially you might see before your lifetime and I do sincerely hope that is a positive one.

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